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Shoppers ascend and descend escalators at the King of Prussia Mall, owned by Simon Property Group, in King of Prussia, Penn., on Dec. 8, 2018. The company is one of the largest owners of retail malls in the world and a compelling post-COVID-19 reopening play.Mark Makela/Reuters

Real estate investment trusts (REITs) are attractive for investors seeking income. Even though they may be seen as “bond proxies,” it doesn’t mean rising interest rates will always hurt them.

In fact, REITs typically outperform when central banks hike interest rates. The strong economic growth associated with these time periods usually results in rising rents, lower vacancy and improved profitability.

On the other hand, REITs have historically underperformed when long bond yields rise as the increase in growth expectations can entice investors to take on more risk in their portfolios. It did not happen earlier this year, though. Instead, REITs rallied after being oversold due to the COVID-19 pandemic, even as the fundamentals for many of them were improving as economies looked to reopen.

We asked three portfolio managers for REIT picks that they think can still do well when interest rates begin to rise gradually in a growing economy.

Lee Goldman, senior portfolio manager, Signature Global Asset Management, a unit of CI Investments Inc.

His fund: CI Canadian REIT ETF RIT-T

The pick: Morguard North American Residential REIT MRG-UN-T

52-week range: $13.55 to $17.34 a unit

Forward annual distribution and yield: 0.70 cents (4.1 per cent)

Morguard North American REIT has a compelling valuation but falls under the radar partly because its management is “not very promotional,” Mr. Goldman says. The Mississauga-based REIT trades at a significant discount to consensus net asset value (NAV) of about $24 a unit, he says. “It got hit hard during the pandemic … but it should come back as people realize how cheap it is compared with the other names.” Sixty per cent of its assets are in the U.S., while the rest is mostly in Ontario. The REIT can easily raise rents if there are inflationary pressures in markets that are strong with no rent control, he says. Because Morguard charges an average of $1,500-a-month rent in Canada and US$1,400 in the U.S., it could raise the amount and still be affordable, he says. Risks include a new wave of COVID-19 and increased apartment supply in the U.S. market.

The pick: Chartwell Retirement Residences CSH-UN-T

52-week range: $8.85 to $13.76 a unit

Forward annual distribution and yield: 0.61 cents (4.6 per cent)

Chartwell, which is the largest provider of seniors’ housing in Canada, will benefit from the lifting of COVID-19 restrictions that will become more evident in the second half of this year, Mr. Goldman says. The Mississauga-based REIT, which gets 90 per cent of its income from retirement homes and the rest from long-term care, suffered during the pandemic when it couldn’t take in new residents. Chartwell’s occupancy rate fell to less than 79 per cent by the end of the first quarter of this year versus 88 per cent a year ago, he adds. Demand will really pick up as aging baby boomers need more care, while the growing need for more retirement homes will benefit Chartwell because it’s also a developer, he says. Chartwell trades slightly above its NAV, but “it’s going to continue to be a strong performer.” A risk is a fourth wave of COVID-19.

Dean Orrico, president and chief investment officer (CIO), Middlefield Capital Corp.

His fund: Middlefield REIT Indexplus ETF IDR-T

The pick: Canadian Apartment Properties REIT (CAPREIT) CAR-UN-T

52-week range: $42.22 to $60.75 a unit

Forward annual distribution and yield: $1.38 (2.3 per cent)

Canada’s largest apartment REIT should benefit from rising immigration and foreign students returning to the country as COVID-19 restrictions ease, Mr. Orrico says. Toronto-based CAPREIT could also gain from more people renting rather than buying homes because they have become too expensive, he adds. The REIT focuses on Quebec, British Columbia as well as Ontario. He notes that the rent freeze in Ontario will be lifted next year and market rents can then be charged on vacated premises. It also has a majority interest in European Residential REIT ERE-UN-T. Although CAPREIT trades around its NAV, that’s cheap compared with its historical 10-to-15-per-cent premium to NAV, he adds. Rising pension fund interest in buying private apartment buildings should also help drive up valuations, he says. Risks include a potential fourth wave of COVID-19.

The pick: Summit Industrial Income REIT SMU-UN-T

52-week range: $11.01 to $18.19 a unit

Forward annual distribution and yield: 0.56 cents (3.1 per cent)

This industrial REIT, which has more than 50 per cent of its portfolio in the Greater Toronto Area (GTA), has a strong tailwind from the growing online shopping trend, Mr. Orrico says. Although Markham, Ont.-based Summit Industrial Income REIT got a major boost from the pandemic, “e-commerce is only about 13 per cent of total retail sales in Canada versus 20 per cent to 25 per cent in the U.S.,” he says. The GTA, where demand and rents are high for warehouses, is the second-largest North American industrial market after Chicago when calculating gross leasable area, he says. Based on a recent sale of industrial properties by Artis REIT AX-UN-T, Summit trades at about a 15-per-cent premium to its NAV, but that’s “not outlandish” given its potential growth, he says. “[Summit] could also be a takeover target.” A recession is a potential risk.

Dennis Mitchell, chief executive officer and CIO, Starlight Capital

His fund: Starlight Global Real Estate Fund SCGI-NE

The pick: Simon Property Group Inc. SPG-N

52-week range: US$59.03 to US$136.70 a share

Forward annual dividend and yield: US$5.60 (4.3 per cent)

Simon Property Group, one of the largest owners of retail malls in the world, is a compelling post-COVID-19 reopening play, Mr. Mitchell says. The Indianapolis-based REIT, which focuses mostly on super-regional malls and premium outlets in the U.S., also owns stakes in businesses in France, South Korea and China. Although its shares trade at a premium to NAV, it’s one of the few U.S. retail names that should see strong growth this year and in 2022, he adds. “That should drive industry-leading NAV growth going forward.” Simon Property Groups’s malls cater to the “haves,” who have benefited from a K-shaped recovery, he says. The diverging strokes of the letter K represent people who are affluent or have grown wealthier, while the “have-nots” are struggling or are jobless. A risk stems from some tenants hurt by the e-commerce trend.

The pick: Kimco Realty Corp. KIM-N

52-week range: US$10.03 to US$22.31 a share

Forward annual dividend and yield: 0.68 US cents (3.3 per cent)

Kimco, which owns a portfolio of North American strip malls anchored by grocery stores, is attractive because of the defensive nature of its assets, Mr. Mitchell says. The Jericho, N.Y.-based REIT gets about 80 per cent of its rent from grocery and drug-store tenants, so it “has a very safe, stable cash flow,” he adds. These stores largely remained open during the COVID-19 pandemic, while grocers also benefited from e-commerce. Although Kimco suspended its quarterly dividend in May 2020 when it was at 28 US cents a share, it has reinstated its payout, which now stands at 17 US cents. Kimco shares now trade at a premium to NAV, but that’s justified based on expectations of future cash-flow growth, he adds. Risks include some tenants struggling to make rent payments, and the longer-term impact of e-commerce on some of its retailers.

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